"A terrorist attack is highly likely, but there is no intelligence to suggest that an attack is imminent," U.K. Home Secretary Theresa May said in a statement.

Prime Minister David Cameron said the risk from terrorism in the U.K. was at a "three-year high".

The U.K.'s FTSE 100 benchmark fell by as much as 0.3 percent, before recovering to close flat. It narrowly underperformed the pan-European FTSEurofirst 300, which ended unofficially 0.1 higher at 1,370.7 points.

The French CAC 40 closed unofficially 0.1 percent higher, while the German DAX ended down 0.2 percent.

Overall, shares ended the last trading day of August higher on the month, with the FTSEurofirst 300 up around 1.8 percent.

European shares were pressured lower during Friday's session by the release of euro zone inflation figures. Consumer prices rose just 0.3 percent year-on-year in August, according to the official Eurostat figures. This was inline with expectations, but below July's 0.4 percent figure and well below the European Central Bank (ECB)'s target of close-to-2 percent.

Market participants said the reading reduced the chances of an immediate announcement of a quantitative easing program by the ECB. Expectations has been running relatively high that the ECB would act at its September 4 meeting, after President Mario Draghi sounded a dovish note at his Jackson Hole speech last Friday.

Retail stocks were the major laggard on Friday, with a profit warning being released by U.K. supermarket chain Tesco.

The company slashed its profit expectations for the year and also cut its dividend, ahead of the early arrival of its new chief executive. Shares closed down around 6.6 percent and U.K. rivals like Sainsbury and WM Morrison were also pressured lower.

"This really does look like a company that's in full-blown crisis mode," Tony Cross, a market analyst at TrustnetDirect said of Tesco. "However, getting the bad news out the way now ought to the new chief exec better scope to impress the markets in the months and years ahead without being harangued by investors at every turn."

Russian stocks closed down around 1.6 percent lower after NATO accused Russia of "blatant violation" of Ukraine's sovereignty, and said it had engaged in direct military operations to support separatist rebels.

President Barack Obama said the United States was not currently planning any military intervention, but added that he had agreed with German Chancellor Angela Merkel to consider additional sanctions on Russia.